TIP #1: WATCH THE ALTERNATIVE MINIMUM TAX
AMT was set up several decades ago to keep the wealthy paying taxes because otherwise they would take so many deductions that they were paying no taxes at all. The government set this up to say, if you're making this certain amount of money, you're going to pay a minimum tax.
But it doesn't take into account inflation.
About 4 million people were paying the AMT in 2006; now because of inflation you could see more than 20 million paying it.
There's legislation in Congress to fix this but so far it hasn't been finalized. You have to watch the news to see if between now and the end of the year Congress takes action to change the AMT.
CAN YOU DO ANYTHING ABOUT IT?
Not much you can do - you're kind of stuck. We suggest talking to an accountant or financial advisor; there's no clear path. This way if Congress doesn't change the AMT, you won't be surprised in April.
The IRS told Congress they need something passed but in order to do that Congress needs to figure out where they're going to get the new revenue to make up the difference.
Tip #2: SELL LOSER INVESTMENTS
Selling unsuccessful investments is a good tip. If you have stocks or mutual funds underwater, you should consider dumping them. Use those losses to offset capital gains from successful stocks and income, and to lower your tax bracket.
If you have losses over $3,000 then carry that over to next year. But it has to be done before the end of year.
Tip #3: PRE-PAY DEDUCTIBLE EXPENSES
If you have a January mortgage bill, send it in December and that means you'll have 13 payments in 2007, and you'll get a bigger deduction on your mortgage for 2007 tax. It works as long as you can afford that on your mortgage and it's perfectly legal. This makes sense if you're going to be in same or lower tax bracket.
Tip #4: USE FLEXIBLE SPENDING
Some people set aside money upfront at the beginning of the year that is withdrawn from paychecks for medical costs, and sometimes you don't reach that threshold (i.e., if you set aside $1000 pre-tax for medical bills and you only used $600 of it). You have to use that leftover money or you lose it entirely. Go out and spend the money on anything from prescriptions upfront to Advil. It's a "use-it-or-lose-it" situation, so why lose?
FLEXIBLE SPENDING APPLIES TO LOTS OF THINGS: TRANSPORTATION, MEDICAL …
Yes, but the biggest one is the medical expense, that's the one that you probably have the most money in and that expires. That's the one you need to take advantage of. Most of the other things (transportation, etc) are not so pricey that it makes much of a difference. Medicine can be several hundred dollars.
Tip #5: BOOST RETIREMENT CONTRIBUTIONS
If you're able to boost your retirement contribution, do it. If you haven't fully funded your deductible IRA, you can change your contribution amount whenever you want; it's $15,000/yr for most employees, and it helps lower your tax bracket.
Besides helping the future you by depositing money you can't touch until 59.5, setting aside funds in an IRA or 401(k) also helps lower your current taxable income off the bat. You're taxed less when your paycheck comes, and you're taxed less in April.
THE BOTTOM LINE: WHY DO ALL THIS?
The bottom line is that you set these things up so you'll be paying less in taxes in April, or even getting refunds. But you have to do them before the end of the year.